Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
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Chapter 6, Problem 4P
An analyst gathered daily stock returns for Feburary 1 through March 31, calculated the Fama-French factors for each day in the sample (SMBt and HMLt), and estimated the Fama-French regression model shown in Equation 6-21. The estimated coefficients were ai = 0, bi = 1.2, ci = −0.4, and di = 1.3. On April 1, the market return was 10%, the return on the SMB portfolio (rSMB) was 3.2%, and the return on the HML portfolio (rHML) was 4.8%. Using the estimated model, what was the stock’s predicted return for April 1?
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Estimate a stock's beta (i.e., the sensitivity of the stock's returns to the returns on the market) based on the following information about the changes in stock returns and market returns over the course of three months: Month 1: Stock -2.5%, Market -2%. Month 2: Stock -.5%, Market -.25%. Month 3: Stock +1.5%, Market +1.25%.
The following shows the expected percentage returns on three stocks over the next six years:Stock Percentage Return (%)Year 1 2 3 4 5 6A 10 5 6 8 12 15B 8 4 4. 80 6.4 9.6 12C 5 10 12 10 6 6
Required:(i) Find the expected return for each of the stock.(ii) Compute the variance and standard deviation for stock A, B and C. Show your working.(iii) Justify how can you minimize the risk of the above combination of stocks. (Must show working method as well)
The following are the monthly rates of return for Madison Cookies and for Sophie Electric during a six-month period.
Month
Madison Cookies
Sophie Electric
1
-0.04
0.07
2
0.06
-0.02
3
-0.07
-0.10
4
0.12
0.15
5
-0.02
-0.06
6
0.05
0.02
Compute the following:
a. Average monthly rate of return, Ri, for each stock
b. Standard deviation of returns for each stock
c. Covariance between the rates of return
d. The correlation coefficient between the rates of return
What level of correlation would you have expected before performing your calculations? How did your expectations compare with the computed correlation? Would these two stocks be good choices for diversification? Why or why not?
Chapter 6 Solutions
Financial Management: Theory & Practice
Ch. 6 - The probability distribution of a less risky...Ch. 6 - Security A has an expected return of 7%, a...Ch. 6 - If investors’ aversion to risk increased, would...Ch. 6 - Prob. 5QCh. 6 - Your investment club has only two stocks in its...Ch. 6 - Prob. 2PCh. 6 - Suppose that the risk-free rate is 5% and that the...Ch. 6 - An analyst gathered daily stock returns for...Ch. 6 - A stocks return has the following distribution:...Ch. 6 - The market and Stock J have the following...
Ch. 6 - Suppose rRF = 5%, rM = 10%, and rA = 12%. a....Ch. 6 - As an equity analyst you are concerned with what...Ch. 6 - Your retirement fund consists of a $5,000...Ch. 6 - Prob. 10PCh. 6 - You have a $2 million portfolio consisting of a...Ch. 6 - Stock R has a beta of 1.5, Stock S has a beta of...Ch. 6 - You are considering an investment in either...Ch. 6 - You have observed the following returns over...Ch. 6 - What are investment returns? What is the return on...Ch. 6 - Graph the probability distribution for the bond...Ch. 6 - Use the scenario data to calculate the expected...Ch. 6 - What is the stand-alone risk? Use the scenario...Ch. 6 - Your client has decided that the risk of the bond...Ch. 6 - Your client is shocked at how much risk Blandy...Ch. 6 - Explain correlation to your client. Calculate the...Ch. 6 - Prob. 8MCCh. 6 - Prob. 9MCCh. 6 - Prob. 10MCCh. 6 - Prob. 11MCCh. 6 - Calculate the correlation coefficient between...Ch. 6 - Prob. 13MCCh. 6 - (1) Suppose the risk-free rate goes up to 7%. What...Ch. 6 - Your client decides to invest $1.4 million in...Ch. 6 - Jordan Jones (JJ) and Casey Carter (CC) are...Ch. 6 - What does market equilibrium mean? If equilibrium...Ch. 6 - What is the Efficient Markets Hypothesis (EMH),...
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